Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard,Inc.at a price of $65 per board.Mighty Safe is considering making its own boards.The costs to make the board are as follows: direct materials,$32 per unit; direct labor,$10 per unit; and variable factory overhead,$16.00 per unit.Fixed costs for the plant would increase by $75,000.Which option should be selected and why?

Question

Quizplus · Accepted Answer

The cost to make each board is $32 (materials) + $10 (labor) + $16 (overhead) = $58 per unit. For 50,000 units, the total variable cost is 50,000 * $58 = $2,900,000. Adding the $75,000 fixed costs, the total cost to make the boards is $2,975,000. Buying the boards costs 50,000 * $65 = $3,250,000. Thus, making the boards saves $3,250,000 - $2,975,000 = $275,000, increasing profits by this amount.

Mighty Safe Fire Alarm Is Currently Buying 50,000 Motherboards from MotherBoard,Inc.at